HMRC Compliance Checks: Prison Is Now on the Table for Reckless Returns - and Accountants Are in Scope

Picture two sole practitioners opening the same letter about the same error: a relief claimed on a client company's return that HMRC says was not due.

Same tax. Same mistake. Same paragraph of legislation.

One firm pays the tax and no penalty. The other pays the tax plus 30%.

The difference was not the accuracy of the numbers. It is what each firm can show about how the position was reached at the time it was taken.

That part is not new. HMRC has priced penalties by behaviour, not by the size of the error, since 2009.

What is new is this summer. HMRC has proposed adding prison to the top of that ladder, and a tribunal has ruled that relying on an adviser is not, on its own, a defence.

Both changes point at the same thing: the record you made at the time.

What is an HMRC compliance check?

A compliance check is HMRC reviewing your tax affairs to confirm the right amount was paid: any tax you pay, accounts and tax calculations, Self Assessment or Company Tax Returns, and PAYE records where there are employees. If more tax is due, it is normally payable within 30 days.

The check carries rights worth knowing cold. You can have an accountant or adviser present, apply for alternative dispute resolution at any point, appeal a decision you disagree with, and write to the issuing office asking for the check to be stopped if you believe it is unjustified.

What the GOV.UK overview does not spell out is the part that decides how expensive the letter becomes. That lives in the penalty factsheets, and it is a ladder.

The same error can cost 0% or 100%: the behaviour ladder

Under HMRC's inaccuracy-penalty factsheet CC/FS7a, the penalty for an error is a percentage of the extra tax. The percentage is set by two things: the behaviour behind the error, and whether you told HMRC before or after it came asking.

Three mechanics in that factsheet matter more than the headline ranges.

Disclosure quality is scored on telling, helping and giving access to records - worth up to 30%, 40% and 30% of the available reduction in turn.

Timeliness is priced too. A disclosure that arrives three years or more after the error normally caps the reduction at 10 percentage points above the range's minimum.

And a careless penalty can be suspended for up to two years against conditions, though ICAEW's Tax Faculty notes HMRC is reluctant to suspend for one-off errors, because suspension conditions must be able to fix something systematic.

One more line in the factsheet deserves a partner's attention. Where a deliberate-inaccuracy penalty falls on a company that is insolvent, or where an officer gained personally from the error, HMRC can make the director pay some or all of it. The ladder does not stop at the company.

Read the whole ladder from a distance and the pattern is plain: every rung is a judgement about conduct, and every escalation or reduction turns on what can be evidenced about that conduct.

Reasonable care is a records standard, by HMRC's own definition

Here is the sentence most firms have never read closely. When CC/FS7a defines taking reasonable care, its list begins: "keeping enough records to make accurate tax returns" and "keeping those records safe". Asking HMRC or an adviser when unsure, and following the advice, comes after.

Which means the 0% row of that table is not awarded for being right. It is awarded for being able to show how you tried to be right.

Reasonable care is not a state of mind. In practice, it is a state of file.

The Upper Tribunal reinforced the point this summer from the other direction. In a pension-scheme penalty appeal, two administrators who followed their adviser's instruction not to comply with information notices lost their reasonable-excuse argument.

Applying the Perrin test, the tribunal held that blindly relying on advice, without questioning guidance that lacked detail or changed abruptly, was not enough. Even with a competent adviser engaged, the taxpayer must exercise independent judgement, and be able to show they did.

For a practice, that cuts both ways. Your client cannot simply say "my accountant handled it", and you cannot simply say "the client confirmed it". Both defences live or die on what was recorded when the judgement was made.

The proposed recklessness offence adds a criminal rung

This is the context for the consultation HMRC closed on 16 August. The proposal: a new criminal offence of recklessly making an untrue statement or declaration in a direct tax matter, carrying up to two years' custody or an unlimited fine, applying to taxpayers and agents equally.

Recklessness means being aware of a risk the statement was untrue and unreasonably proceeding anyway. The consultation is explicit that carelessness and genuine mistakes stay in the civil regime.

The profession's response has been blunt. ICAEW rejected the case for the offence, arguing HMRC should use its existing powers better, and recommending the rarely used indirect-tax equivalent be repealed rather than copied.

"There is considerable uncertainty around the circumstances in which HMRC may believe that a taxpayer or agent has engaged in reckless behaviour." - Richard Jones, senior tax technical manager, ICAEW

ICAEW's sharpest technical jab lands on HMRC's own paperwork: the examples in the consultation document describe people being careless, not reckless. The uncertainty is baked into the proposal's own illustrations.

Its sharpest objection is an incentives one. Fear of a criminal investigation could make advisers and taxpayers limit contact with HMRC, including voluntary disclosures. Set that against the ladder above and the objection has arithmetic behind it: an unprompted careless disclosure can be reduced to nil, a prompted one starts at 15%, so anything that chills disclosure has a measurable price.

The definitions should make every practitioner sit up too. A "statement" can be written or oral, potentially including statements made implicitly by a person's actions, and even a careless remark during an enquiry could theoretically qualify. KPMG's practical conclusion is the documentation one: the proposal signals "the ongoing and continued importance of documenting tax positions".

Whether or not the offence reaches statute, the direction is set. The question a check asks is drifting from "was this right?" towards "what did you know, and what did you do about it, at the moment you signed?"

The judgement note: five lines, written at the moment of judgement

Strip all of this to a working habit and it is small. Every tax position that involved a real judgement call earns a note, made when the call is made, holding five lines: the question that had more than one answer, the facts relied on, where each fact came from, the position taken and why, and who confirmed it.

Five lines feels almost too light. That is the point.

A firm will not sustain a defensive memo for every judgement, but it will sustain five lines. And five lines written in February beat five paragraphs reconstructed two years later, because a reconstruction proves diligence today and says nothing about your state of mind then.

The mechanics only work if the note lives with everything else about that client. A note in one person's drafts folder fails the retrieval test the day HMRC's letter arrives and that person is on leave.

You can see what solving this looks like at scale. Larking Gowen, a Top 40 UK firm with a 450-strong team, runs collaboration between teams and clients through a single client record for exactly this reason.

"Having one source of truth for collaboration between teams and clients enables us to deliver exceptional service." - Martin Bugg, director, Larking Gowen

The same sentence, read against a compliance check, is a defence strategy: one place where the working papers, the client's confirmations, the approvals and the judgement notes already sit together, retrievable by whoever answers the letter.

What to do before the next letter arrives

Run the CC/FS7a test on one live client. Pick a recent return with a judgement call in it and ask what the file would produce today: the records behind the figures, the advice sought, the client's confirmation. If the answer is a reconstruction, that is the gap.

Put judgement notes where the leverage is. Not every entry needs one. Reliefs claimed, valuations, residence and status calls, anything where you weighed two readings: those are the positions a behaviour assessment will probe.

Decide your disclosure posture in advance. The ladder pays for speed: unprompted disclosure of a careless error can be reduced to nil, prompted starts at 15%, and a disclosure three years late loses most of its reduction. A firm that finds an error should already know how it responds, because the incentive decays while you deliberate.

Check the file failures your own regulator already measures. ICAEW's 2026 Practice Assurance monitoring report, drawn from more than 2,000 reviews in 2025, found breaches of the Money Laundering Regulations in 63% of reviews - again the most common finding - and recorded 283 instances where fee basis and complaints rights had not been confirmed to clients in writing. The firms that struggle in a compliance check and the firms that struggle in a Practice Assurance review are usually struggling with the same thing: evidence that exists, somewhere, but not against the client it belongs to.

The file that answers before you do

None of the above requires new heroics from your team. It requires the evidence of ordinary work - the records, the emails, the approvals, the five-line notes - to build against the right client automatically, while the work happens.

That is the layer Workiro adds around the tax and practice software a firm already runs: every document, message and sign-off filed to one client record, timestamped, searchable when a letter arrives.

If the two-practitioners story at the top had a name from your own client list in it, that is the walkthrough to book: bring that client, and we will show you what their file would produce in an hour. Book a walkthrough. Not ready for that? Start with how firms keep working papers audit-ready all year.